The Uranium Industry
In 2016, the uranium industry weathered one of the most difficult years in recent history. An oversupplied spot market put dramatic downward pressure on the spot price of U3O8, despite the announcement of various production curtailments from uranium producers. The spot price started the year at $34.25 per pound U3O8, and lost nearly 20% by the end of the first quarter of 2016, breaking through the $30.00 per pound U3O8 threshold. Following six months of steady price declines during the middle of the year, the spot price plummeted from $26.00 per pound U3O8 to a 12-year low of $17.75 per pound U3O8 by November 2016. At its low for the year, the spot price had fallen 50% from where it started 2016 at $34.25 per pound U3O8. Needless to say, industry insiders have pointed to multiple reasons for the dramatic decline in spot prices during 2016 -- including the disappointing rate of nuclear reactor restarts in Japan (following initial restarts in 2015, after the Fukushima Daichii nuclear incident led to a total shut down of nuclear power generation in Japan in 2011), the deferral of utility contracting expected to commence in 2017, and an abundance of secondary supplies entering the market (including underfeeding from under-utilized enrichment plants). Even the long-term contract price of uranium, which is typically less volatile than the spot price, fell over 30%, from a price of $44.00 per pound U3O8 at the beginning of the year, to end 2016 at $30.00 per pound U3O8.
Juxtaposed to statistics from the U.S. Energy Information Administration and American Nuclear Society regarding the fact that more new nuclear power capacity was added to the global electricity grid, on a net basis, during 2015 and again in 2016 than in any other year over the last 25 years, a steep decline in the uranium price during 2016 seems illogical. This view is bolstered by the fact that a uranium price in the low $20.00 per pound range renders even the lowest cost producing uranium mine in the world, according to Ux Consulting Company, LLC ("UxC"), to lose money on an all-in cost per pound basis. With demand for uranium forecasted to increase steadily through to 2030, meaningful new capacity coming onto the grid at present, and a uranium mining production pipeline that has been stagnated by several years while uranium prices fail to incentivize the majority of undeveloped uranium projects towards construction, logic would suggest that prices should be on the rise. Underpinning that logic, however, is the assumption that growing demand in the future translates into increased buying today, and that an oversupplied spot market with historically low prices will be fixed by opportunistic buying for long-term utility needs. While volumes in the spot market remain relatively steady in the 40-50 million pounds U3O8 per year range, long term utility contracting volumes sit at levels nearly 75% below the height of the market's annual contracting volumes from 2007 to 2012 (when annual contracting volumes reached as high as 250 million pounds U3O8 per year). Without meaningful sales volumes, a truly sustainable uranium price has been difficult to discover. Instead, sellers simply outnumber buyers and prices have been subject to downward pressure.
With the world's largest uranium producer, Kazatomprom, having announced (in early 2017) a 10% reduction in its planned production for 2017, the uranium market has finally started to show some signs of a potential turn-around. While the market remains oversupplied, a combination of production cuts from the world's largest producers, and a dysfunctional project pipeline that is unlikely to deliver meaningful new sources of primary supply to the market before 2025, has helped to buoy a recovery in the spot price through the end of 2016 and into early 2017. For a recovery to be sustained, however, utility buying must resume and contracting volumes must increase as utilities work towards securing over 1.5 billion pounds U3O8 in uncovered uranium requirements for the period between 2017 and 2030. With few new sources of supply on the horizon over the next 8 to 10 years (and beyond), a significant contracting cycle is expected to lead to the realization that current uranium prices are well below the level required to incentivize most new sources of primary supply, thus leading to a potentially sustained market of rising prices as buyers are forced to bid up the price to secure available supplies of uranium or bring new sources of supply into the market.
Much of the uncovered future demand is estimated to come from non-U.S. utilities, as growth in nuclear energy is expected to be driven by increasing nuclear generating capacities in Asia -- primarily from China, India and South Korea. According to the World Nuclear Association ("WNA"), as of March 1, 2017, China had 36 operable nuclear reactors (+6 from January 1, 2016) capable of producing 32.6 gigawatts of electricity. A further 21 reactors are under construction (-3 from January 1, 2016) and an additional 179 reactors are either planned or proposed (+3 from January 1, 2016). UxC, in its "Uranium Market Outlook -- Q1'2017" (the "Q1 Outlook"), estimates that 108 reactors are expected to be operable and capable of producing over 113 gigawatts of electricity in China by 2030. To achieve this level of production, China's fleet of nuclear reactors will have to increase by between 5 and 6 reactors each year for the next 13 years. The WNA is projecting a similar growth profile for India, where 22 reactors (+1 from January 1, 2016) were operable as of March 1, 2017, capable of producing 6.2 gigawatts of power. Taken together, 69 reactors are either under construction, planned or proposed in India (+ 3 from January 1, 2016). UxC estimates that India could have over 36 operable reactors generating nearly 18 gigawatts of nuclear energy by 2030, representing 3 times as much power capacity as is currently available from nuclear. To achieve this level of production, India's fleet of nuclear reactors will have to increase by at least one additional reactor each year over the next 13 years.
Although the uranium market is expected to remain oversupplied in the near term, the long term growth projections for the nuclear industry, combined with the expected depletion of uranium resources in operation today, continue to suggest that a significant long term supply shortage could emerge, even after factoring in new production sources that are expected to come online. With a sustained period of low commodity prices, the uranium mining industry has been challenged to discover and advance the new production sources necessary to meet the expected increase in demand in future years. This story remains unchanged, and accordingly higher prices are expected to be needed to justify the construction of new mines. In the absence of a significant price increase in the near term, it is possible that even the most ambitious development plans could leave the market with an unavoidable supply shortage as soon as the early 2020s.
Uranium Demand (Bold)
The WNA reports that there are 447 nuclear reactors (+8 from January 1, 2016) operable in 31 countries as of March 1, 2017. These reactors can generate 391.9 gigawatts of electricity and supply over 11% of the world's electrical requirements. As of March 1, 2017, 59 nuclear reactors are under construction in 14 countries with the principal drivers of this expansion being China (21 reactors under construction), Russia (7), India (5), the United States (4), UAE (4), and South Korea (3). Based on the most recent statistics from the WNA, there are a total of 223 reactors that are either under construction, or planned around the world, and an additional 350 reactors that are proposed.
According to UxC's Q1 Outlook, global nuclear power capacities are projected to increase from 379.4 gigawatts in 2015 (the most recent reference year) to over 483 gigawatts by 2030. UxC also estimates that annual uranium demand could grow nearly 60% to more than 300 million pounds U3O8 by 2030 from 190.2 million pounds U3O8 in 2016.
Primary Uranium Supply (Bold)
According to the Q1 Outlook, uranium production increased slightly year over year from 158.3 million pounds U3O8 in 2015 to 163.4 million pounds U3O8 in 2016. Production in 2017, however, is expected to decrease back below 2015 levels to 157.8 million pounds U3O8, which would represent a 3.4% reduction for the year. Production from Russia, and the United States declined in 2016, while production from Kazakhstan, Australia, and Africa increased slightly. Production in Canada rose 5% or 1.9 million pounds U3O8 from the ramp up of activit